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Has the Condo Market Collapsed?

Posted by admin on June 26, 2007 in Real Estate

Next to “my taxes are too high,” a frequent saying I hear among all people (regardless of investment acumen) is that “the condo market is over-built” or “don’t invest in a condo- the market is going to collapse!” One of the local news-stations is running a series on whether Toronto has too many condos under construction and what this will mean for real estate buyers and investors. In certain cities, like Miami, condo investors have had to sell their units at substantial discounts given the over-supply of condos. All of this has fueled talk of a condo bust (if it has not occurred in some cities).

However, according to the Internet chat boards, 400 of the 470 units in the L Tower in Toronto- a high-end condo designed by world famous architect Danial Libeskind- have already been pre-sold before ever being released to the general public and the Ritz-Carleton Hotel-Condo project in Toronto sold enough units to commence building quite quickly. Finally, Fortune Magazine reported that 90% of the units in the MGM Mirage project in Las Vegas were sold in the first two weeks of release- starting price: $1.5 million.

How do we explain the perception of a condo bust and the above paragraph?

Essentially, it is difficult to describe the condo market as homogeneous. Based on observation, the condo market has really splintered since the last condo downturn of the early 90′s. You now have world-class architects building high-end luxury condos (I define high-end in Toronto as anything over $500/sq. foot) in a scale not seen in the 1990′s. In Toronto, we have the Ritz-Carleton hotel-condo, The Trump hotel-condo, the Four Seasons Hotel-Condo, the Shangri-La and other high-end boutique projects all being sold at the same time. Vancouver will be the site of Norman Foster’s first mixed use residential building in North America (he did the Millennium Bridge in London). Finally, Santiago Calatrava (the architect du jour) is designing a 2,000 ft. condo next to Navy Pier in Chicago. Some of these designs are award-winning, project-defining pieces that attract buyers internationally.

On the other hand, you still have cookie-cutter condos being built for real estate investors and first time home-owners.

It is these cookie-cutter condos that I would stay away from if you are investing in a condo- the supply is over-whelming in some cities; Fortune Magazine reports that Naples, Florida has a 36 month supply of condos coming on-stream with 42 months worth of supply already on the market (Naples, Florida?). The over-supply is causing some real problems for real estate investors. In Toronto, there is a huge supply of our cookie-cutter end condos along the lake front and, having just helped someone rent out their unit in this area, it is becoming very difficult to rent these units out since a new building goes up every other month which is newer and cheaper than the last and people are throwing in LCD tv’s to entice people to rent. We got very lucky with our tenant who had to relocate on very short notice but nothing happened for 2 weeks after we advertised (and we used an agent too).

And, of course, the rich do think differently. The rich, according to this study, want to buy more real estate since the luxury end of the housing market has held up in the United States. They may see this downturn as nothing more than a buying opportunity (which supports my argument that you can never have too much cash lying around).

It appears that the condo market is collapsing depending on which end of the market you are at and where. On the low end, supply appears to eating into prices and, in areas of great over-supply, real estate investors are fleeing the market at a loss. On the high-end, there seems to be some down-side protection. Most of us cannot afford to purchase a top of the line unit on the high-end building but consider that most high end condos do sell smaller units (500-600 sq. ft) at half-way affordable prices which can be rented out for an attractive gain, investing in a starter unit in a higher end condo may not be a bad investment if you like to play real estate (a big if depending where you live). To give you a real life example, I ran the figures if I rented out my condo at the same rent as the previous owner and, based on my carrying costs and maintanence fees, I would be returning 17% a year (assume no cost of upkeep). My condo is not high end but it is not cookie-cutter either but it returns more the cookie-cutter unit by the lake (carrying costs are approximately the same).

If real estate investing is for you, recent trends in the condo industry seem to support the real estate rule that you should buy the worse unit in the best location/condo. Even if you are buying/investing in a tiny unit in a high-end condo, you may have some protection in the event of a downturn.